“Overhead Levy” in China

With economic downturn, it becomes more and more difficult to reach annual revenue targets for many China’s tax bureaus. To achieve revenue targets, local tax bureaus turn to taxing in excess, so “overhead levy” comes. Generally speaking, there are two ways of “overhead levy”: one is to collect the next year’s tax in advance, and the other is to levy more taxes or fees to enterprises.

Then, we have heard various reports related to tax collection from the second half of this year. In October, it was reported that many enterprises had to pay their taxes in advance in some places in Zhejiang Province. Yet, it’s not surprising that some businesses also had been forced to pay so-called “overhead levy” in Xian County in Hebei Province. However, we’re impressed by the “overhead levy” of Xian County for its two astonishing “innovations”:

One is the desperate measure tax officials took to meet their fiscal targets. According to the report, some businessmen were told by local tax officials that because of fraying Sino-Japanese relations over the Diaoyu/Senkaku islands dispute, war was likely to break out and it would be the duty of business people to “support the country”. So they should pay the "Diaoyu Islands war tax". Compare to other “overhead levy” collections, tax officials of Xian County didn’t feel any guilty of violating the Tax Law, and it rarely happens in other places.

The second is tax collectors. Though the “overhead levy” is collected by working staffs of tax bureaus, businessmen are told to pay the tax to collector’s personal account instead of the institutional account. Because of this, tax-payers realize such "war tax" is illegal, and then media reports appear.

Such “overhead levy” has serious harms. Firstly, it harms the image of government agencies: in order to fulfill tax collection tasks, tax bureaus order enterprises to pay more taxes with various reasons including extremely ridiculous ones. Undoubtedly, such behaviors are misuse of authority and even “racketeering”. For example, as the case of Xian County, the tax bureau threatened the enterprise with “overall auditing” if it refused to pay the tax. Secondly, collecting taxes without any legal process is a bare violation on private properties protected by law. Besides, too many taxes would damage the economic development. Especially when the economic downturn has lessened tax income, tax bureaus would take more severe tax collection and supervision. As a result, aggravated tax burden will harm companies’ developments. Just like a personage in tax system points out, “the enterprises are already very difficult, the local governments don’t reduce tax but increase it, it’s quite unreasonable, but we as operational staff have nothing to do with it.”

But, why does “overhead levy” only happen in the years of economic downturn?

Contrast with the excessive taxation, we can’t ignore the fact that fiscal revenues have far outpaced the GDP growth. According to the information of State Statistics Bureau, in the first three quarters of this year, almost all provinces enjoy fiscal revenue growth much higher than their respective GDP growth except for Inner Mongolia, Zhejiang and Shanghai. For example, the fiscal revenue of Jiangxi increases 33% while its GDP increases 10.6%. Why?

All these are due to the spend-and-tax fiscal budget system in China. According to the system, government not only makes budget for expenditures but also for incomes. It determines that in many cases, tax payers need to bear extra expenditures for the estimated incomes by fiscal authorities. Then there will be a problem appearing, under the fiscal principle of making ends meet, when the fiscal revenue rapidly increases, it means governments’ expenditure scale will expand correspondingly. But when the fiscal revenue growth slows down or even falls negative, the spending scale will not be adjusted correspondingly. At this time, the fiscal and tax authorities will develop new taxes or fees for funding, such as various extra charges, fuel consumption tax and pilots for housing property taxes etc.

However, we can do nothing on this problem when there’s no limit to the power of the government. In such situation, the expenditures and the income they get is like a chess game to them, and the Treasury just decides it for itself. Just because of this reason, the collection of “overhead levy” will take turns to appear in all places.

The problem is that, tax is originally the by-product of business activities, but not the purpose. If putting the cart before the horse, how can we forbid the phenomena of “overhead levy” to happen again?

Originally published on Oriental Morning Post | 2012-11-29